PMI- Private Mortgage Insurance
PMI or private mortgage insurance is an insurance that a lender will require a homeowner to take out if the mortgage amount is for more than 80% loan to value of a home purchase mortgage. This basically states that if a homeowner is buying a home for $250,000 and the mortgage is for more than $200,000 then the borrower will be required to pay a monthly private mortgage insurance premium. This type of home loan insurance is put in place totally to protect the lender in the event of a mortgage default by the homeowner.
What is PMI
If a homeowner who has borrowed more than 80% to fund the purchase of a home goes into default and is foreclosed on the private mortgage insurance company will pay the lender an amount up to the 20% conventional down payment that the foreclosure sale fall short by.
How Much Does PMI Cost
Monthly PMI premiums can be substantial in our example above of a $250,000 home purchase if the homeowner only made a down payment of 10% then the home loan amount would be $225,000. In this scenario the monthly private mortgage insurance premium would be $116.25. This would be on top of the principle and interest payment of $1496.93 assuming a home loan at 7% interest rate over 30 years.
When estimating the monthly service of a home loan it is also necessary to factor in real estate taxes and homeowners insurance which may or may not be escrowed.
How to Avoid PMI
There are some ways to get around PMI the best being to take out a second mortgage for the difference between your down payment and 80% of the home purchase price. Inn our example of a $250,000 home purchase where the homeowner can only afford a 10% or $25,000 down payment then the home buyer would take out a second mortgage for 10% or $25,000. This would negate the need for PMI and save the homeowner $116.25 every month.
In a scenario where property prices have escalated and the homeowner can prove that their equity position in the home is for more than 20% of the outstanding balance of the first mortgage, then the homeowner can have the lender agree to cancel the PMI policy.
Home Loan Insurance
Home loan insurance is a necessary part of becoming a homeowner whether it is hazard insurance or PMI (private mortgage insurance). From the perspective of the homeowner it is necessary to perform proper due diligence to ensure that you do not end up paying for unnecessary home loan insurance.
